Small Business Health Insurance Tax Credit: Who’s Eligible? (Part 1)

Changes in healthcare provide small-business owners chance to take advantage of tax credits

ARDMORE, Pa. — Survey after survey reveals that health insurance is among the top fringe benefits sought by employees. For many drycleaning businesses, offering health insurance is critical to attracting the type of workers needed to succeed. Fortunately, whether the business presently offers health insurance or is merely considering offering it, there is a sliver of silver lining in the form of a unique, often-overlooked tax credit for small employers.

The Internal Revenue Service (IRS) is encouraging small businesses to explore and, if qualified, claim a unique health insurance coverage tax credit. Statistics from 2011 reveal that two out of five businesses in the nation will qualify for these tax credits. This could affect 19.3 million employees and possibly provide $15.4 billion in tax credits to small businesses.

In fact, many small businesses with 25 or fewer employees are already taking advantage of this new tax credit.

THE SMALL-EMPLOYER CREDIT

A drycleaning plant or laundry business that provides healthcare coverage is eligible for the Small Business Health Insurance Tax Credit if, for the tax year, they have 25 or fewer full-time equivalent (FTE) employees who are paid an average annual salary of less than $50,000. The tax credits are higher the lower the average salary and the fewer FTEs with the drycleaning business. The maximum credit is 35% this year and rises to 50% of the annual premium paid for 2014 and thereafter.

To qualify for tax credits, the employer also must contribute at least 50% toward the employee’s premium cost. Owner’s salaries and owner’s family’s salaries are not counted in determining the average salary.

While any business meeting the above standards is eligible to receive a tax credit of up to 35%, the Small Business Health Care Tax Credit actually works on a sliding scale and is specifically targeted for those businesses with low- and moderate-income workers. Bottom line, the tax credit is highest for drycleaning businesses that have fewer than 10 employees who are paid an average of $25,000 or less. In other words, the smaller the business, the bigger the credit.

NEW IRS RULES

The IRS recently proposed guidelines for the small-employer tax credit created by the Affordable Care Act. Among other things, the guidelines address eligibility requirements for employers to claim the credit, provide guidance on how to calculate and claim the credit, and explain the effect on estimated tax, alternative minimum tax and, of course, tax deductions.

Under the guidelines, to take advantage of this tax credit, small-business owners must have in place a contribution arrangement through which the business can make a non-elective contribution on behalf of each employee who enrolls in a qualified health plan (QHP) offered by the employer.

The contribution amount must be at least 50% of the QHP’s premium cost. In addition, the average annual wages of the employer’s FTEs cannot currently exceed $50,000. Through 2013, the maximum credit is 35% of premiums paid by small-business employers. For tax years beginning in 2014 or later, the maximum credit will increase to 50% of premiums paid by drycleaning businesses/employers.

And, as mentioned, the IRS has said certain higher-income individuals, specifically sole proprietors, partners in partnerships, or shareholders owning more than 2% of the stock in an S corporation, and any owners of more than 5% of other businesses, do not have to be counted as employees when calculating the average wage. Although the tax law does not specifically refer to spouses, the IRS says that spouses are nevertheless excluded from the definition of “employee” for those purposes.

The proposed IRS guidelines also contain transition rules if an eligible small employer’s plan year begins on a date other than the first day of its taxable year. Since about 30% of employers in the small group market don’t have plans that run on a calendar year, the new rules mean premiums paid by the drycleaning business under an old plan as well as what the business is paying when it switches to the exchange will be eligible for the tax credit.

What’s more, all qualifying drycleaning and laundry businesses are eligible to buy health insurance on a special exchange known as Small Business Health Options Program (SHOP).

Check back Monday for the conclusion!

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult a tax attorney for advice regarding your particluar situation.